Swoop Holdings Limited (SWP) Earnings Call Transcript & Summary

Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Swoop Holdings Full Year Results Investor Briefing. [Operator Instructions] I will now turn the conference over to Alex West, CEO. You may begin your conference.

Hello, everyone. Thank you for joining today. My name is Alex West and I'm CEO of Swoop. With me on the call is Patricia Jones, our CFO. Again, thank you for joining us for the results from our second full year since listing on the ASX in May 2021. This morning, we will be running through our FY '23 investor briefing that was uploaded to the platform this morning. So firstly, on Slide 3, who is Swoop. So for those that are new to the story or just need a reminder, Swoop is a premium provider of residential and SMB broadband, delivering over our own high-margin fixed wireless infrastructure to underserved regional and outer metro areas of Australia as well as via NBN for national coverage. We now also operate under the Moose Mobile brand, deploying residential mobile telephony for price-conscious customers via a national MVNO on the Optus network. And it's through this go-to-market strategy that we achieved fantastic result this year that we'll now run through. On Slide 4, our FY '23 highlights summary. I am delighted to report that we've had another great year, which saw strong growth in revenues, underlying EBITDA and cash flow. This growth has delivered an FY '23 revenue of AUD 78.2 million, up 51% on last year. Our underlying EBITDA was AUD 16.3 million, up 25% on FY '22. And this growth has been consistent since FY '20 with 73% compound annual growth rate in revenues, and we have increased EBITDA by AUD 14.5 million over the same period. We have also seen significant growth in our subscriber numbers with a 304% increase since the end of FY '22, and this includes the Moose acquisition. But we have also seen a 16% increase in the non-mobile subscriber numbers over the same period. We've seen massive improvements in our net operating cash flow since FY '22, growing 62% to AUD 14.3 million. And we have also improved our free cash flow achieving our target in Q4 of FY '23 of a positive AUD 0.5 million free cash flow, with the majority of the CapEx spend in FY '23 being on customer network growth and key customer and network systems and will continue to deliver results in FY '24 and beyond. We still have a significant amount of firepower on our balance sheet with AUD 19 million in cash, combined with AUD 12 million in undrawn debt available to capitalize on any potential opportunities. And throughout the year, we bought back 9.3 million Swoop shares executing on our capital management strategy. Looking further into our FY '23 highlights on page -- on Slide 5. As I mentioned, we saw a 51% increase in revenues to AUD 78.2 million in FY '23, which also represents a 73% compound annual growth rate since FY '20. Gross margin increased 40% to AUD 32.3 million for FY '23, a 61% compound annual growth rate since FY '20. And our underlying EBITDA grew 25% to AUD 16.3 million, a 108% CAGR as a result of both the contributions from acquisitions completed during the year as well as organic growth and the efficiencies of the combined business. These efficiencies can be demonstrated in the 10% improvement on our OpEx compared to revenue, which is now 20% down from 30% last year. Essentially, we've been able to achieve strong revenue growth without significantly increasing our operating expenses and should be able to do so for the foreseeable future. Moving on to Slide 6, talking about cash flows. We have seen strong growth in our operating cash flow, now AUD 14.3 million for the year, increasing 62% from FY '22. And our free cash flow has improved AUD 6.7 million for the full year. And as I mentioned before, we have achieved our target exiting the full year with a Q4 free cash flow of positive AUD 0.5 million, which is a significant milestone for the business. And then looking at some of our key operating metrics on Slide 7. Looking now into the business update and key operating metrics at the end of June 30, we had 516 fixed wireless towers, a slight increase in staff to 172 as we improve -- continued to improve efficiency of the business. The total services operation of 155,843, which includes the Moose acquisition of mobile customers, which is made up of 8,166 wholesale services, driven up by organic growth. 6,789 business service, increasing from the number [ of NDME services sold ]. And we saw 140,888 residential services with growth coming from our focus on underserved customers looking for a better telco experience as well as the addition of the Moose mobile customers. And then on Slide 9, focusing more on SIO growth. Overall, we saw a 304% increase compared to the last full year, increasing to 155,000 subscribers, which included the Moose acquisition as well as a 16% increase in our non-mobile services. On a per sector basis, our residential services, non-mobile, grew by 15% to 29,712 throughout the year, our business services grew by 8% to 6,789, up from 6,278 and our wholesale services grew to 8,166 which equates to a 28% increase on the previous year. And then on Slide 10, we can talk about our infrastructure expansion. We continued to focus on our infrastructure with over 51% of our services still continued on-net delivering high margins. We also saw our tower numbers increase by 6% to 516 sites, up from the 485 through targeted organic growth, with the majority of our new towers in outer metro regional areas of Victoria, South Australia and Western Australia. And then I'll close out the update on the results before handing over to Patricia just taking a look at Slide 11. We're looking at our more significant acquisition that we completed this year. Moose Mobile was indeed a significant acquisition and our most -- and our largest to date was completed in November 2022. Moose Mobile is a Queensland-based national mobile virtual network operator. Now provides over 110,000 mobile services on the Optus network to customers across Australia. There is a significant cross-sell potential with 110,000 Moose customers for Swoop fixed wireless and NBN services and 30,000 Swoop residential customers for Moose Mobile services with [ Swoop Mobile ] launching in the last 2 weeks as a premium offering to this customer cohort. Moose is a strong growth engine growing 18% since we announced the transaction in July and is also a strong cash generation with a very high proportion of EBITDA converted to cash. I will now hand over to Patricia Jones, who will run through the financial highlights in more detail.

Thanks, Alex, and good morning, everyone. So moving over to Slide 13. FY '23 has been another fantastic year of performance, bolstered by both the successful acquisition of Moose and strong organic growth in the remainder of the business. Our second half results have contributed AUD 41 million in revenue, which is up 10.7% on the first half and AUD 9 million EBITDA, up 24% on the first half. Drilling down into the full year financial results further on Page 13. Revenue is up 51% to AUD 78.2 million from AUD 51.7 million in FY '22. Gross margin is up 14% to AUD 32.3 million from AUD 28.3 million. Underlying EBITDA is up 25% to AUD 16.3 million from AUD 13 million, reflecting the contribution from Moose as well as strong organic growth. Underlying EBITDA is an important metric for our business as it reflects the underlying operational earnings. It excludes non-cash items such as share-based payment expenses and other one-off items such as acquisition and integration costs and corporate restructuring costs. And the 25% increase in FY '23 reflects our solid growth strategy in terms of both the accretive acquisition of Moose and the integration of well-performing businesses and the organic growth of the existing business. Looking at our gross margin for the period. While the gross margin percentage is lower in FY '23 when compared to FY '22, this is largely driven by the acquisition of Moose. While Moose is a lower gross margin business when compared to the remainder of the Swoop business, it is a strong growth engine and free cash flow generator. We continue to be vigilant and proactive in managing costs, operating expenses and overhead as a proportion of revenue of 20% in FY '23, a large reduction from 30% in FY '22. Through tight cost control and the continued realization of synergies and scale as we consolidate our numerous acquisitions, we've been able to hold our operating expense as an overhead at relatively flat levels while generating a solid increase in revenue. This strategy of continued and measured cost control and identifying and securing further efficiencies will be a key feature of our strategy heading into FY '24. Finally, our statutory net loss after tax for FY '23 is AUD 37.5 million. This reflects FY '23 impairment charges of AUD 27 million as well as the impact of the amortization of acquired intangibles on the acquisition of Moose, the cost in FY '23 of funding the Moose acquisition by our finance facilities and a high level of deferred tax expense for accounting purposes in FY '23. Our statutory net loss after tax also includes share-based payments expenses and acquisition and integration costs. Moving over to Slide 14, revenue. So as mentioned previously, revenue was up 51% on FY '22. This revenue growth reflects an organic growth of 6% plus contribution from co-build income and 11 months of Moose revenue, including the organic growth derived from that business while under the ownership of Swoop. While the major contributor to revenue growth has been the acquisition of Moose, the very strong growth in residential SIOs by 15% has also been a driver. Over to our cash flow position on Page 15 of the presentation. We finished the year with a strong cash position of AUD 19 million and exited fourth quarter of FY '23 with a positive free cash flow of AUD 0.5 million. The Q4 positive free cash flow follows quarter-on-quarter improvement during the year from minus AUD 1.8 million in Q4 FY '22 and progressively improving to a positive position by Q4 FY '23. When we look at the full year, our free cash flow position has improved by AUD 6.7 million. This has been driven by strong growth in operating cash flow from AUD 8.9 million in FY '22 to AUD 14.3 million in FY '23. CapEx was AUD 16.7 million for the year, with the majority of this for expansion network and investment in systems to support customer growth. The AUD 24.5 million spent on other investing activities is largely driven by the Moose acquisition, which concluded in November '22. In addition to this, we paid the deferred consideration payments during the year from previous acquisitions. Net cash and closing financing activities were AUD 14.5 million. This is made up of the approximately AUD 19 million drawdown to fund the Moose acquisition, less AUD 3.7 million spent on our on-market share buyback during the year. Turning to our balance sheet on Page 16 of the presentation. We finished the year with a solid balance sheet that is positioned for continued growth. In addition to cash of AUD 19 million, we also have AUD 12 million remaining in unused debt facilities, providing a continued runway for growth and strategic opportunities. Our intangible assets have increased AUD 5.7 million during the year. This is largely driven by the Moose acquisition and the value ascribed to its customer base, the Moose brands, contractual agreements in place and goodwill. And then offsetting this is AUD 19.6 million in impairment charges as a result of our annual impairment testing across the business. A further AUD 7.5 million provision for impairment has been made against plant and equipment and the total impairment charges for the year to AUD 27 million. Total borrowings of AUD 18.6 million at 30 June, following a partial drawdown of our Westpac facility to the Moose acquisition in November. The AUD 4.5 million deferred consideration on the balance sheet also relates to Moose, and that represents a discounted value of the currently estimated value of the earn-out. Our net asset position is AUD 62.3 million at 30 June '23, and this is being after the AUD 27 million impairment charges recognized this year. So going into a little bit more detail on that impairment on Slide 17 in the pack. So as just noted, we recognized AUD 27 million in impairment charges as a result of our annual impairment testing. Annual impairment testing is required under AASB 136 and following a review of the asset got on the balance sheet at 30 June '23, certain assets were identified as expressing indicators of impairments. These assets can be summarized into the following broad categories, our older network infrastructure, which was no longer revenue generating, legacy software, which is no longer in use, as we have progressively developed new software, plants acquired as part of some previous acquisitions, which are expected to discontinue and customer relationships recognized in previous acquisitions where the actual observed customer attrition rates were higher relative to expected levels of customer attrition at acquisition. Impairment charges of AUD 22.7 million were recognized across these 4 categories of assets. Following this impairment of individual assets, we then tested the recoverability of goodwill using a fair value less cost to sell methodology using DCF projections. This identified an impairment to residual goodwill of AUD 4.4 million, bringing the total impairment charges to AUD 27 million. I'll now hand back over to Alex.

Thank you, Patricia. And now looking to the future in terms of strategy and outlook going forward. On Slide 19. We will continue to invest in our customer growth through strong brands that have exceptional reviews as compared to our peers with an increasing targeted marketing. With a focus on delighting customers, we are keeping our churn rates low and focusing on our core products being broadband, fixed wireless, mobile, NBN and voice to residential and SMB customers, both direct and through our strong channel partnerships. And this customer recession is being recognized in the industry with the Swoop brand being recognized as a finalist in the Australian customer service awards with the winners to be announced in November and Moose Mobile being the only telco to ever win both the Most Satisfied Customers and Outstanding Value Canstar Awards in the same year. On Slide 20, we will continue to invest in growing our infrastructure, which will be in our existing regions based off customer demand as it has been in FY '23 to increase market share. We will also continue our regionally focused co-build projects with our private and government partners that commenced in FY '23 and will be ongoing for the first half or 6 to 9 months of FY '24. But once completed, we'll deliver significant stock on the shelf for potential residential and business customers in regional Australia, looking for high-quality, reliable and locally supported broadband services. And finally, we will continue the program that was tested in FY '22 and FY '23 to build fixed wireless infrastructure in smaller regional and rural towns that are currently underserved by existing technology and through the support of local councils [indiscernible] for premium broadband. These small investments in local areas have achieved better than average market penetration in a small sales window of 2 to 3 months from project completion with a project payback of between 1 to 2 years with strong positive cash flows thereafter. In terms of scale, we have identified an initial 50 to 100 areas that could fit these profiles based on the existing towns that we've been successful in. And we will continue to test the model throughout FY '24 as we accelerate into FY '25. Now on Slide 21. With the majority of our core operational systems now in place, we have begun migrating our customers, and we'll continue to do so throughout FY '24 [ to then churn off ] legacy systems and networks to drive efficiencies. These efficiencies are demonstrated by a massive overachievement in annual activities from our acquisition, achieving over 200% of our original AUD 0.5 million target quoted previously, providing benefit into FY '24 and beyond. We will also continue to focus on simplifying and streamlining our processes and systems through automation and APIs to provide a frictionless experience to delight our customers. And so as I conclude on Slide 22, we had expanding organic growth opportunities, both in our underlying businesses as well as the strong growth engine in Moose. The previous acquisitions have been integrating well and growing well under Swoop. We have a strong brand in our regions and are well below the industry churn. Our continued investment in higher-margin infrastructure is delivering results. The scale of acquisition synergies has exceeded our original targets and are continuing to deliver benefits into FY '24. And we have one of the most experienced and capable management and Board teams ready to build the next large scale national telecommunications company. So along with the Board, the executive and the entire Swoop team, we are looking forward to continuing success into FY '24 and beyond. Thank you.

[Operator Instructions] We have no questions in the queue at this time. Alex, I'll turn this back over to you.

Well, thank you. Thank you all for joining. I'm sure I'll be speaking to a few of you, a lot of you over the coming weeks to further go into the results. Thank you for taking the time this morning, and we look forward, as I said, to a massive FY '24 as we continue to grow. Thank you, everyone.

Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect.